Benefits from a Liquidated Damages Contract

Contractors get busy in springtime. Some of this work will come with a deadline. For example: “Can you finish in time for a June wedding?” Or, "Can it be ready for cousins visiting in July?” Any owner with a deadline will want assurance you’re going to finish on time – and may ask for a discount if you can’t. That discount is called liquidated damages. But it can work two ways, as I’ll explain.

Agreements with a deadline are usually referred to as “time is of the essence” contracts. You’ll see those words somewhere in the agreement. Any time you see those words, the contractor carries a dual burden:

• Finish the work as planned;
• Finish the work by a specific date.

The owner sets a deadline because some opportunity or advantage will be lost if work is finished late. Actual damages for late completion are notoriously hard to measure and prove. If time is of the essence, it’s much better to use a liquidated damages clause in the contract. Damages to the owner are set at a specific dollar amount for each calendar day of delay. That removes any uncertainty about the amount of damage and simplifies figuring the loss.

Courts like that. But courts won’t enforce a pure penalty for late completion. The damage amount has to be a reasonable estimate, for example, the cost of hotel space if work isn’t done in time for the wedding.

Benefits from Liquidated Damages

I wouldn’t turn down any reasonable request for completion by a deadline. There’s money to be made from liquidated damages. If you’ve got the resources and feel comfortable about on-time completion, bid the job based on the owner’s deadline.

But build some gravy into the job for your extra trouble. For example, write a bonus into the contract for:

1. Meeting intermediate milestones in the construction schedule;
2. Substantial completion (everything but the punch list) by the deadline date;
3. Punch list items corrected by a set date.

Then protect yourself. The contract should extend the completion date for:

• Changes in job plans or specs;
• Shortages of labor, materials or equipment;
• Unusually adverse weather;
• Delay caused by any act or omission of the owner.

Other points your contract should cover: If the job has several parts and if some part is completed on time and another part is not completed when due, your contract should prorate liquidated damages. Then make liquidated damages the exclusive remedy for late completion. Finally, cap liquidated damages at the amount you’re owed. Liquidated damages shouldn’t put you in the hole.

Obviously, drafting a liquidated damages contract takes some care. Consider the contract language carefully. Be sure the most likely problems are covered and resolved in your favor. With the right liquidated damages contract, you can make good money.

I don’t know of a better source for drafting liquidated damages contracts than Construction Contract Writer. The trial version is free.